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Wednesday, July 29th, 2015


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Four Cornerstones of Investing

Windfalls happen. Back when college students were still pecking out their term papers on typewriters, a company called Microsoft went public. Ten years later, computers were everywhere and the term “Microsoft millionaire” had become part of the American lexicon.

Amazon stock plummeted to around $5 at the end of 2001, and stock analysts were calling it dead meat. Some investors scoffed at the experts and put their money where their laugh was. It was great timing for those who went for it. Amazon ricocheted off of the bottom and soared to over $50 a share within two years. Nice.

Unfortunately, for every jackpot story, there are a thousand other tales about investors who lost barrels of money speculating their way through high-risk, short-term gambles. Trying to time the market is best left to those who figure they have nothing to lose (because that’s all they may have in the end). For most of us, the only way to accumulate savings is to begin investing early in life. By holding the course and staying close to some fundamental guidelines, the years—and the market—will treat us right.

Buy into the long term

When it comes to investing, time is your friend. For example, if you’re in your early twenties and you invest $1,000 once a year in a tax deferred IRA in an investment that averages a 7% annual return, it’ll grow to more than $1 million after 46 years tax deferred.   That makes for a pretty sweet retirement kickoff. Compound interest can be a beautiful thing—especially when measured through the span of decades.

If you’re into quick gratification, good luck. Your best chance may be with a slot machine. You probably have just as much chance of lining up six rows of diamond clusters as you do of picking the next meteoric stock. Long-term investing isn’t flashy, but it has a solid success rate.

Use index funds

Index funds are growing in popularity. They are passively managed and take much of the guesswork out of investing. Years of investment research show that mutual fund managers who try to buy and sell individual companies based on their own research have a hard time outperforming the broader markets over time. An index is a group of stocks or bonds that experts believe represent a larger group of investments, such as all “stocks on the NASDAQ” or all “high tech stocks.” Exchange Traded Funds (ETFs) are a type of index fund. When you invest in an ETF, you’re buying shares of an index fund that mimics a certain group of stocks. In general, simplicity and lower costs make index funds very attractive.

Diversification can diminish risk

Spread your investments among different asset classes. You want to have exposure to a number of different companies so that your investment success isn’t dependent on a single company or sector of the market. No one knows for certain which investments will rise in price. Staying diversified increases your chances of owning investments that rise in value. Just as importantly, diversification helps reduce risk in your portfolio and improve your returns over time. As you go on, it’s essential that you do timely rebalancing of your portfolio so that you don’t end up with more risk than you realize. Have a target allocation of stocks, bonds and cash—and stick with it.

Invest automatically, dollar by dollar

ShareBuilder is an online brokerage that features low-cost, automatic, dollar-based investing. What this means is that you can buy fractional shares. You don’t have to be shut out because the stock you want is selling for $137 and you only have $100 a month to invest. Your monthly investment amount can be spread across the investments you have chosen. $100 could buy a tenth of a share of one company, a quarter of a share of another and a full share of yet another—it doesn’t matter. The important thing is that you have the ability to regularly invest in companies you believe in. Time and consistency convert fractions into bigger whole numbers.   

Bonus tip: START NOW

One of the biggest regrets running through older generations is the lamentable “If I only would have invested when I was young . . .” If you’re a twenty-something right now, you have an opportunity to start saving for your financial future. Even if you begin with a small monthly amount, a commitment to regular investing will add up in the long run. It’s a decision that can determine the quality of your life in the years up ahead. Start now. It’s painless and you’ll never regret it. 

© 2005 ShareBuilder Corporation. ShareBuilder is offered through ShareBuilder Securities Corporation, and a registered broker-dealer and member NASD/SIPC, and a subsidiary of ShareBuilder Corporation. ShareBuilder is not affiliated with Young Money.   Call (800) 215-4679 with questions about ShareBuilder.

 

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